These 4 Measures Indicate That Visual China GroupLtd (SZSE:000681) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Visual China Group Co.,Ltd. (SZSE:000681) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Visual China GroupLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Visual China GroupLtd had CN¥100.4m of debt, an increase on CN¥88.9m, over one year. However, its balance sheet shows it holds CN¥398.5m in cash, so it actually has CN¥298.0m net cash.

A Look At Visual China GroupLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Visual China GroupLtd had liabilities of CN¥471.6m due within 12 months and liabilities of CN¥211.1m due beyond that. On the other hand, it had cash of CN¥398.5m and CN¥260.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥24.0m.

This state of affairs indicates that Visual China GroupLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥14.7b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Visual China GroupLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for Visual China GroupLtd

Also good is that Visual China GroupLtd grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Visual China GroupLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Visual China GroupLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Visual China GroupLtd actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Visual China GroupLtd has CN¥298.0m in net cash. The cherry on top was that in converted 140% of that EBIT to free cash flow, bringing in CN¥107m. So we don't think Visual China GroupLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Visual China GroupLtd (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.